Banking as a service (BaaS) now represents a $7 trillion market opportunity, and financial executives are quickly moving toward offering their own services.

Core provider Finastra last month published its “Banking as a Service: Outlook 2022” report, which found that 85% of bank and financial services executives are implementing BaaS solutions at their institutions, and 80% of regulated providers expect the industry to continue growing. A 2021 report from research firm Gartner echoed these findings, stating that BaaS gives small and mid-size banks a prime opportunity to diversify and digitize revenue streams.

Banks have a “top of wallet” opportunity if they become early deployers of BaaS, Angus Ross, Finastra chief growth and revenue officer, BaaS and technology alliances, told Bank Automation News.

“If you are an early mover, the chances of you getting beyond market share of that move is logical, because you are going to be one of the first movers in that point and context,” Ross said. “If you are the first one, two or three banks that are providing those services in those contexts — versus bank 10, 12 or 13 — you have locked in priority placement.”

When embarking on BaaS, Ross recommends a “breakthrough session,” a six- to eight-week process which moves through ideation, iteration and identification of essential services, although this is just one part of the broader process.

“Doing a quick upfront exercise to narrow what you’re going to do, and then starting experimenting, is absolutely critical,” he added.

Set expectations and partner for success

A key best practice for banks arrives early in the journey, when excitement and expectations are at their highest. Setting appropriate expectations, selecting aligned technology and compliance partners, and preparing to learn on the journey are important for getting BaaS off the ground, Jesse Honigberg, technology chief of staff at $5 billion Fort Lee, N.J.-based Cross River Bank, told BAN.

“Do not swing for the fences on your first time at the bat,” Honigberg said. “Set moderate expectations, find a partner that you are comfortable with from a compliance standpoint, that knows you are early in the journey.” Honigberg recently spoke at the 2022 Bank Automation Summit.

Ross added that banks cannot accomplish their operational or technological goals alone.

“The way we’re going to market and building assets, at the pace that we want to contest this market, is augmented significantly by partnerships,” Ross said. “You’ve got to partner, but do not partner with hundreds. Work out what your partner ecosystem is to accelerate against your roadmap.”

Use technology as a tool, not a foundation

Over-indexing on technology can stall BaaS operations, Honigberg told BAN. As a source of new revenues for banks, BaaS should centralize on answering client needs with speed, at scale, while technology like application programming interfaces (APIs), embedded fintech integrations, and data automation underpin the process.

“Our BaaS strategy really started with small products,” Honigberg said. “It wasn’t that we were looking for problems to solve with technology. It’s that we found problems that needed solving and were able to kind of use technology to help create the operational leverage.”

The technology behind BaaS often comes with its own set of hurdles. Enrico Camerinelli, strategic advisor at research firm Aite-Novarica, told BAN that BaaS and embedded banking solutions must allow banks to operate at the general ledger (G/L) level.

“Today, money flows at G/L level are channeled to a single bank account,” Camerinelli said. “Many G/Ls to one account are not traceable. Tomorrow, the flows from G/Ls to account must be traced continuously.”

Establish compliance

Compliance and risk management is perhaps the most important step in the BaaS process, Honigberg told BAN. Embedding compliance within a bank’s top BaaS priorities allows both regulators and board members to see a tighter and more complete “compliance envelope” and follows naturally with a narrow and defined service roadmap.

“Compliance is not something you can afford to get wrong,” Honigberg said. “If you’re launching a very broad BaaS strategy, but you don’t have that story complete, it’s going to come back to bite you.”

Josh Williams, chief banking officer at $762 million Seattle Bank, added that “when providing BaaS, banks must work hand-in-hand with partners to ensure from product design, marketing, client onboarding, and ongoing servicing that consumers are protected, and regulatory obligations are met.”